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French Version

Big banks engage in phony rate war to pad deposit figures

'Nothing more than window-dressing'

Raising interest rates on deposits to attract more customers and improve balance sheets is expected to intensify in the next two months, some bankers said on Wednesday.

"This race is nothing more than window-dressing to demonstrate that these banks have larger customer deposit base than the others," Shadi Karam, the president of BLC Bank, told The Daily Star.

He added that this fierce competition is driving the entire banking sector into a race for deposits which is extremely costly for everyone.

Some of the top five banks in Lebanon, which control a big chunk of the market, customarily hike interest rates in the last two months of the year to show that their balance sheets are higher than the others.

"They increase the interest rates on dollar and Lebanese bank deposits are for a short period of time only. The purpose of this hike is to show an impressive growth in deposits," Karam said.

He added that the race is confined between the two largest banks in the country.

The race is particularly strong between BLOM Bank and Audi Saradar Group, which have assets of more than $10 billion each.

Karam said that in principle interest rates on dollar deposits should not exceed 5.5 percent or 5.75 percent, depending on the size of the deposits.

"Some of the large banks are offering their preferred customers who have large deposits more than 7 percent on the dollar deposit," Karam said.

The chairman of Bank of Beirut, Salim Sfeir echoed, similar views.

"The agreement not to raise interest rates above the ceiling is never respected unfortunately," Sfeir said.

"When some of the leading banks become very close in the size of deposits, the interest-rate war rages," Sfeir said.

But Sfeir was bit cautious about the temporary hike of interest rates.

"Those who deposit their money before the end of the year will eventually withdraw their deposits at the beginning of next year."

He added that this policy will not serve any purpose because it is too costly for the bank and may spoil the value system of banks.

The interest rates on the US dollar rose sharply in the past two years and became very close to the rates offered by Lebanese banks.

Most of the revenues and profits of banks are mainly derived from interest payments, although these has been a growing trend to focus more in non interest revenues such as commissions and fees.

Sfeir said that this interest war is unique in Lebanon and probably does not exist in any other country in the world.

The banking sector has long been seen as the backbone of the Lebanese economy due to its large assets and deposits that are three times the size of the country's GDP.

Central Bank governor Riad Salameh said that total assets of banks is estimated at $72 billion while deposits are close to $65 billion.

But the Central Bank and the Association of Banks in Lebanon cannot compel any commercial bank not to hike its interest rates.

"The Central Bank can only make a recommendation," Karam said.

He added that if some of the banks raise interest rates above the average rates then they may be forced to increase interest rates on lending to make up for the difference. "When you buy at a high price then you have to sell at a high price."

He added that some of the banks are already offering 7 percent on dollar deposits and 10.5 percent on Lebanese pound deposits.

Karam and Sfeir said that the rate hikes on deposits will not affecting Treasury bills.

But Joe Sarrouh, the adviser to the chairman of Fransabank, did not see anything unusual about the hike in interest rates on deposits.

"Some of the big banks are competing for size and they hike the rates by not more than 0.50 percent or 1 percent."

He added that the temporary hike in interest rates is not an indicator that the rates are in the upward trend in the long term.

Beirut 27-10-2006
Osama Habib
The Daily Star

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